Solid Q3 Rebound

The latest economic data out of Australia this week showed that the country returned to inflation over Q3 following the nearly 2% contraction over Q2. Q3 CPI came in at 1.6%, beating expectations of a 1.5% reading. Annual inflation was also seen rising 0.7% from Q2 according to the Australian Bureau of Statistics.

Similarly, the trimmed-mean inflation reading (core inflation) was seen at 0.4% over the quarter, rising from the -0.1% reading in Q2 and beating expectations of a 0.3% reading. Both data sets recovered strongly over the quarter offering encouragement over the pace of the economic pickup in activity following the passing of the height of the pandemic.

Childcare Fees Main Driver

The ABS noted that the big driver in the pickup in inflation was the return of childcare fees which has been free during Q2. Childcare fees alone contributed 0.9% to the inflationary rise over the quarter. Automotive fuels were also seen higher over the period, rising 9.4% as oil prices recovered globally. Notably, however, rents recorded their first annual decline in the series history, reflecting the severity of the impact of the virus.

RBA Easing Expectations Grow

Despite the better than expected data, the Australian Dollar is under pressure again this week. The general risk off tone is one of the factors behind the sell-off, as growing fears of a global second wave of the virus weighs on higher yielding assets. The second factor exerting downward pressure on AUD this week is the rising expectation that the RBA will ease further at its upcoming meeting. The latest RBA meeting minutes revealed a change in language which many participants feel, is indicative of a forthcoming rate cut – or additional easing of some sort.

There have been concerns voiced recently that the RBA is out of ammunition and does not have the capacity to ease further in an effective way. However, RBA board member Ian Harper dismissed those claims this week, telling the Wall Street Journal: “There is certainly the capacity for the Reserve Bank to do some more if the board judges that that is appropriate. This idea that the bank has run out of ammunition is false.”

Technical Views

AUDUSD

From a technical viewpoint. AUDUSD continues to correct within the bearish channel which has formed following the reversal from .74. For now, the structure can be viewed s a corrective bull flag, underpinned by the .7031 support, suggesting an eventual break higher is still in play. However, a drop below the .7031 level would open the way for a deeper move down to the .6776 level next.

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